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CBDT Lowers Tolerance Level On TP!

Published on Fri, Apr 26,2013 | 14:20, Updated at Fri, Apr 26 at 14:21Source : Moneycontrol.com 

By: Sanjiv Malhotra, Partner, BMR Advisors

While Indian transfer pricing regulations are generally onerous for the taxpayers, a point of flexibility available was in relation to the concept of a 5 percent tolerance zone. This essentially meant that if the right answer was "x", the taxpayer (as per the original regulations) could have deviated by 5 percent to 0.95x to 1.05x. Then for the tax year 2012-13, it was legislated that the maximum deviation could only be 3 percent which meant a range of 0.97 to 1.03. This being the maximum permissible deviation, Government had the power to bring it further down for identified industries / class of taxpayers.

In a recent circular issued by the Central Board of Direct Taxes (CBDT), this permissible deviation has been brought down to 1 percent for a class of taxpayers referred as "wholesale traders".

But the moment the circular was issued, it ran into criticism. One issue seems to be the ambiguous meaning of the term "wholesale traders". I'm sure that in times to come lawyers would have their interpretations ready with reference to Income tax law, excise, foreign exchange etc. But to keep things simple (and this may be a big assumption while dealing with taxes in India), a wholesale trade may mean dealing in bulk and as opposed to retail, not with the final consumer but with an intermediary. 

Whatever may be the definition the question still remains as to what was the need to carve this section out to a lower tolerance zone. One rationale (and the only one I could think of) is a situation where the wholesale trader is dealing in a commodity the prices are of which are listed in an exchange. Thus, where the price discovery is a relatively easy process, one may argue that the margin of error to be provided to the taxpayer need not be huge. Again there is an assumption here that businesses operate in a rather naive manner wherein the exchange determines the price and there are no other economic variables to be considered. A thought that may not find many buyers in the arbitrage driven economy of the day.

For everyone else it’s the final nail in the coffin. Even statistically speaking, keeping a 1 percent margin of error would be mean that we have a near perfect data sample available. We all know that's never the case. Globally this concept is managed through using an inter-quartile range wherein when the data set is bad, the range tends to be broader and vice-a-versa. This is simply a rule of statistics and not taxation.  Since India doesn't follow this concept of inter-quartile range, taxpayers were holding on tight to this 5 percent tolerance zone that existed. CBDT first curbed this to 3 percent and now for wholesale traders has brought it to 1 percent. This just reflects the current stance to make things harder for taxpayers - an attitude that the global business community well understands now.

Thus, while taxpayers at large may be relieved that the 3 percent tolerance zone remains for them (at least for now), wholesale traders should prepare to hit bulls-eye as there is not much margin of error that will be tolerated.

 
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